This article is edited by CITIC's "the Wind from the" empty Point-- A Special study on the report of shorting.

What kind of company is easy to be targeted?

From the perspective of industryCompanies that have been shorted are widely distributed, with the Internet and media industries accounting for the highest proportion, accounting for 19 per cent, followed by medicine and food and beverage, accounting for 10 per cent and 9 per cent, respectively.

Judging from the performance of stock priceShort sellers tend to choose companies whose share prices have risen sharply in the long term, peaked in the short term and started to fall.Before the short report was released, 71% of companies' share prices had fallen by more than 10% from their peak in a year, of which 60% were between 10% and 50%, and 11% had fallen by more than 50%. The remaining 23% and 5% of the company's shares are at an all-time high or a relatively high within a year, respectively.

From the perspective of financial indicatorsThe core financial indicators of most shorted companies are better than the industry average, 67% of the companies' gross profit margin is higher than the industry average, 62% of the companies' net interest rate is higher than the industry average, but the overall cash flow of operating activities is weak. About 57% of the company's operating cash flow / return net profit is less than 1.

The turnover rate of total assets of the shorted companies is significantly lower than the overall level of the industry.About 60% of the short-sold companies' total asset turnover rate is lower than that of the industry, and only 10% of the companies' total asset turnover efficiency is more than twice the industry average.It shows that the overall operating efficiency of the total assets of the short-sold company is poor, and there is the possibility of falsely increasing assets.

Judging from the short selling situationWithin a month before and after the short selling report was issued, short selling was frequent. On the T30th day of the short selling report, the proportion of short selling transactions of 37% of the companies was higher than the market level. Since then, short selling has become active, and the proportion is on the rise. Until T-1, when the short selling report was issued, the proportion of short selling transactions of 78% of companies was higher than the market level, reaching a peak. After the short selling report was issued, the proportion of short selling transactions gradually returned to the normal level.

What is the basic routine of shorting?

Short selling mainly focuses on the two points of "false profit increase" and "benefit transfer". In addition, it will question the integrity of the company's management, auditor risk and stock price manipulation.

Among them, false income increase and related party transactions are the concerns of short sellers, which are questioned by 86% and 52% of the short selling reports, respectively.

In terms of shorting,Short sellers will use the evidence of field research, combined with information from interviews with dealers / suppliers / industry experts, documents submitted by enterprises to government departments such as industry and commerce / taxation, as well as third-party consulting bodies and various public information, look for contradictions between various external information and the disclosure of the company's annual report, so as to prove the possibility of fraud in the company's annual report data.

Among these evidence, the evidence of field research and interviews with dealers / suppliers / industry experts is relatively reliable, and the probability of success in shorting is relatively high.On the other hand, the probative power of the documents submitted by enterprises to government departments, the data of third-party consulting bodies and public information is relatively weak.

What are the consequences of a company that is shorted?

56% of the shares are still traded normally. Of the remaining 44%, 19 were delisted, 9 were suspended, 12 became fairy shares and 2 failed to list.Short reporting usually accelerates the explosion of problematic companies. Delisted enterprises are basically liquidated 3-5 years after being sold short. Although the suspended companies have not been delisted for the time being, in the three years after the issuance of the report, there are generally problems such as declining performance, major personnel changes, inability to issue financial reports, and so on.

In terms of the impact of short selling on stock prices, share prices generally fell on the day of short selling, with 73% of stocks falling and 30% of stocks falling by more than 10%.In the long runThe share prices of short-selling companies are divided into two levels. With the growing scandals and the actual exposure of problems, the share price decline of some companies has widened, and the share price of 26% of the companies has fallen by more than 50% so far.The share prices of truly valuable companies have continued to rise for a long time, with 16% of companies up more than 50% so far.

Muddy Waters released a 70-page report on June 13, 2018, pointing out that TAL Education Group, a Chinese K12 education giant, has falsely increased profits and whitewashed financial reports since 2016. Affected by the report, TAL Education Group's share price fell, falling as much as 15 per cent. Since then, TAL Education Group's share price has fallen to as low as $21.08. However, TAL Education Group managed to recover the lost territory and set new highs one after another.

The legal consequences faced by short-selling enterprises are: delisting, civil compensation, administrative and criminal penalties. However, few companies have been punished because of the obstacles of cross-border regulation. However, with the further improvement of the domestic Securities Law, Chinese stocks headed by LUCKN COFFEE DRC may face severe penalties in China.

Summary

For investors, it is necessary to look at short selling objectively. In terms of short selling effect, 56% of stocks are still sold normally, of which 28% are up more than 20%, indicating that short selling has a limited long-term impact on truly valuable stocks. If public and high-quality stocks are "touched" by short-sellers, resulting in a sharp fall in stock prices, this may be an opportunity to earn excess returns.